问答题
During the global economic recession that began in mid 2008, many companies found it diffi cult to gain enough credit in the form of short-term loans from their banks and other lenders. In some cases, this caused working capital problems as short-term cash fl ow defi cits could not be funded.
Ultra-Uber Limited (UU), a large manufacturer based in an economically depressed region, had traditionally operated a voluntary supplier payment policy in which it was announced that all trade payables would be paid at or before 20 days and there would be no late payment. This was operated despite the normal payment terms being 30 days. The company gave the reason for this as ‘a desire to publicly demonstrate our social responsibility and support our valued suppliers, most of whom, like UU, also provide employment in this region’. In the 20 years the policy had been in place, the UU website proudly boasted that it had never been broken. Brian Mills, the chief executive often mentioned this as the basis of the company’s social responsibility. ‘Rather than trying to delay our payments to suppliers,’ he often said, ‘we support them and their cash flow. It’s the right thing to do.’ Most of the other directors, however, especially the fi nance director, think that the voluntary supplier payment policy is a mistake. Some say that it is a means of Brian Mills exercising his own ethical beliefs in a way that is not supported by others at UU Limited.
When UU itself came under severe cash fl ow pressure in the summer of 2009 as a result of its bank’s failure to extend credit, the fi nance director told Brian Mills that UU’s liquidity problems would be greatly relieved if they took an average of 30 rather than the 20 days to pay suppliers.
In addition, the manufacturing director said that he could offer another reason why the short-term liquidity at UU was a problem. He said that the credit control department was poor, taking approximately 50 days to receive payment from each customer. He also said that his own inventory control could be improved and he said he would look into that. It was pointed out to the manufacturing director that cost of goods sold was 65% of turnover and this proportion was continuously rising, driving down gross and profi t margins. Due to poor inventory controls, excessively high levels of inventory were held in store at all stages of production. The long-serving sales manager wanted to keep high levels of finished goods so that customers could buy from existing inventory and the manufacturing director wanted to keep high levels of raw materials and work-in-progress to give him minimum response times when a new order came in.
One of the non-executive directors (NEDs) of UU Limited, Bob Ndumo, said that he could not work out why UU was in such a situation as no other company in which he was a NED was having liquidity problems. Bob Ndumo held a number of other NED positions but these were mainly in service-based companies.
Required:
问答题
(a) Defi ne ‘liquidity risk’ and explain why it might be a signifi cant risk to UU Limited. (5 marks)
【正确答案】Liquidity risk
Liquidity risk refers to the diffi culties that can arise from an inability of the company to meet its short-term fi nancing needs, i.e. its ratio of short-term assets to short-term liabilities. Specifi cally, this refers to the organisation’s working capital and meeting short-term cash fl ow needs. The essential elements of managing liquidity risk are, therefore, the controls over receivables, payables, cash and inventories.
Manufacturing has historically had a greater challenge with the management of liquidity risk compared to some other sectors (especially low inventory businesses such as those in service industries like those that Bob Ndumo is NED for). In the case of UU, this is for three reasons.
Firstly, manufacturing usually requires higher working capital levels because it buys in and sells physical inventory, both on credit. This means that both payables and receivables are relatively high. It also, by defi nition, requires inventory in the form of raw materials, work-in-progress and fi nished goods, and therefore the management of inventory turnover is one of the most important management tasks in manufacturing management. In addition, wages are paid throughout the manufacturing process, although it will take some time before fi nished goods are ready for sale.
Secondly, manufacturing has complex management systems resulting from a more complex business model. Whilst other business models create their own liquidity problems, the variability and availability of inventory at different stages and the need to manage inventories at different levels of completion raises liquidity issues not present in many other types of business (such as service based business).
Thirdly, UU has a number of weaknesses that amplify its structural liquidity position as a manufacturer. Its ineffective credit control department and its voluntary 20 day supplier payment policy both increase the short-term cash pressure and thereby increase the likelihood of liquidity risks becoming realised.
【答案解析】
问答题
(b) Defi ne ‘risk embeddedness’ and explain the methods by which risk awareness and management can be embedded in organisations. (7 marks)
【正确答案】Risk embeddedness
Risk embeddedness refers to the way in which risk awareness and management are interwoven into the normality of systems and culture in an organisation. These two twin aspects (systems and culture) are both important because systems describe the way in which work is organised and undertaken, and culture describes the ‘taken-for-grantedness’ of risk awareness and risk management within the organisation.
The methods by which risk awareness and management can be embedded in organisations are as follows:
Aligning individual goals with those of the organisation and building these in as part of the culture. The need for alignment is important because risk awareness needs to be a part of the norms and unquestioned assumptions of the organisation. Training of staff at all levels is essential to ensure risk is embedded throughout the organisation.
Including risk responsibilities with job descriptions. This means that employees at all levels have their risk responsibilities clearly and unambiguously defi ned.
Establishing reward systems that recognise that risks have to be taken (thus avoiding a ‘blame culture’). Those employees that are expected to take risks (such as those planning investments) should have the success of the projects included in their rewards.
Establishing metrics and performance indicators that monitor and feedback information on risks to management. This would ensure that accurate information is always available to the risk committee and/or board, and that there is no incentive to hide relevant information or fail to disclose risky behaviour or poor practice. A ‘suggestion box’ is one way of providing feedback to management.
Communicating risk awareness and risk management messages to staff and publishing success stories. Part of the dissemination of, and creating an incentive for, good practice, internal communications is important in developing culture and continually reminding staff of risk messages.
【答案解析】
问答题
(c) Examine the obstacles to embedding liquidity risk management at UU Limited. (8 marks)
【正确答案】Obstacles to embedding liquidity risk management at UU Limited
The case draws attention to three aspects of working capital management at UU Limited: payables, receivables and inventory. All of these are necessary issues in the management of liquidity and hence the reduction of liquidity risk. Specifi cally, however, it identifi es four potential obstacles to embedding the management of liquidity risk. Primarily, however, the individual managers of the company are all acting in isolation and not working together for the good of the company.
The sales manager’s desire to have high levels of fi nished goods for maximum customer choice. It is quite reasonable for a sales manager to support high levels of fi nished goods inventory but there is an inventory-holding cost associated with that which increases the amount of money tied up in working capital. A wider recognition of the overall liquidity pressures on the business would be a very helpful quality in the sales manager and this is a potential obstacle.
The same points apply to the manufacturing director’s desire to have high raw material levels. Clearly, his effectiveness as head of manufacturing is partly measured by the extent to which the factory fulfi ls orders and avoids the disruptions to production that arise through inventory ‘stock-outs’. He prefers having raw materials in stock rather than having to order them with a supplier’s lead time but this, of course, leads to a greater exposure to liquidity risk.
The ineffective credit control department. According to the manufacturing director, the credit control department, responsible for the timely payment of receivables, was poor. The vulnerability to liquidity risk is clearly infl uenced by days receivables and so an ineffective credit control department is a major obstacle.
Finally, the CEO’s desire to pay payables early as part of the company’s social responsibility efforts. Brian Mills is clearly of the view that offering a voluntary prompt payment of payables is an important component of the company’s social responsibility and that is costing the company an average of 10 days payables on most accounts. Over the course of a year that will place a great deal of arguably unnecessary pressure on working capital. The fact that it is the CEO himself that holds this view might make it diffi cult to change.
【答案解析】
问答题
(d) Criticise the voluntary supplier payment policy as a means of demonstrating UU’s social responsibility. (5 marks)
【正确答案】Criticise the voluntary supplier payment policy
Supplier payment disclosures have become increasingly popular in recent years in some countries as a signal of intent to suppliers that larger buyers will not exploit the economic advantage that they sometimes have over smaller suppliers. It is usual for these statements to announce that all payments will be made in line with the supplier’s terms and so UU’s intention to voluntarily pay within 20 days is more generous that would usually be expected.
In terms of criticism as a means of demonstrating social responsibility, the case says that the purpose of the policy is to ‘publicly demonstrate our social responsibility’. A key limitation of the policy is, however, that the policy only focuses on one stakeholder (suppliers) and apparently ignores other groups. Given the information in the case, the social responsibility policy is apparently aimed at one single stakeholder which is an ineffective overall strategy.
Secondly, however, it is unlikely that this policy is the best use of resources if the desire is to ‘publicly demonstrate’ social responsibility. Measures aimed more at customers or more charitable causes would be likely to attract more publicity if that is the intention.
The policy is very costly to UU in terms of cash flow. So much so that the fi nance director has questioned whether it can actually be afforded, especially at times of a lack of short-term credit, particularly during the global economic recession. It is, of course, a matter of ethical debate as to how committed UU should be to its social responsibility in terms of resources.
Finally, the policy doesn’t enjoy the support of the other directors and is thus hard to maintain as an ongoing commitment. This means it is vulnerable and susceptible to change if the CEO is the only person who really believes in it. As a part of the company’s overall strategic positioning, the components of social responsibility must enjoy widespread support, especially among the senior offi cers in the company, and arguably most importantly, it must enjoy the support of the fi nance director.